Question
Incremental operating cash inflowsStrong Tool Company has been considering purchasing a new lathe to replace a fully depreciated lathe that will last 5 more years.
Incremental operating cash inflowsStrong Tool Company has been considering purchasing a new lathe to replace a fully depreciated lathe that will last 5 more years. The new lathe is expected to have a 5-year life and depreciation charges of $2,300 in Year 1; $3,680 in Year 2; $2,185 in Year 3; $1,380 in both Year 4 and Year 5. The firm estimates the revenues and expenses (excluding depreciation) for the new and the old lathes to be as shown in the following table; The firm is subject to a 40% tax rate on ordinary income.
a. Calculate the operating cash inflows associated with each lathe.
b. Calculate the incremental (relevant) operating cash inflows resulting from the proposed lathe replacement.
c. Depict on a time line the incremental operating cash inflows calculated in part b.
Year 1 2 3 4 5 Revenue $38,600 39,600 40,600 41,600 42,600 New Lathe Expenses (excluding depreciation and interest) $29,400 29,400 29,400 29,400 29,400 Revenue $36,200 36,200 36,200 36,200 36,200 Old Lathe Expenses (excluding depreciation and interest) $23,600 23,600 23,600 23,600 23,600Step by Step Solution
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